The Securities and Exchange Commission
Press Release
SEC Adopts Rule for Pay Ratio Disclosure
Rule Implements Dodd-Frank Mandate While Providing Companies with
Flexibility to Calculate Pay Ratio
FOR IMMEDIATE RELEASE
2015-160
Washington D.C., Aug. 5, 2015
The Securities and Exchange Commission today adopted a final rule that
requires a public company to disclose the ratio of the compensation of its chief
executive officer (CEO) to the median compensation of its employees. The
new rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection
Act, provides companies with flexibility in calculating this pay ratio, and
helps inform shareholders when voting on gsay on pay.h
gThe Commission adopted a carefully calibrated pay ratio disclosure rule that
carries out a statutory mandate,h said SEC Chair Mary Jo White. gThe rule
provides companies with substantial flexibility in determining the pay ratio,
while remaining true to the statutory requirements.h
The new rule will provide shareholders with information they can use to
evaluate a CEOfs compensation, and will require disclosure of the pay ratio in
registration statements, proxy and information statements, and annual reports
that call for executive compensation disclosure. Companies will be
required to provide disclosure of their pay ratios for their first fiscal year
beginning on or after Jan. 1, 2017.
The rule addresses concerns about the costs of compliance by providing
companies with flexibility in meeting the rulefs requirements. For
example, a company will be permitted to select its methodology for identifying
its median employee and that employeefs compensation, including through
statistical sampling of its employee population or other reasonable
methods. The rule also permits companies to make the median employee
determination only once every three years and to choose a determination date
within the last three months of a companyfs fiscal year. In addition, the
rule allows companies to exclude non-U.S. employees from countries in which data
privacy laws or regulations make companies unable to comply with the rule and
provides a de minimis exemption for non-U.S. employees.
The rule does not apply to smaller reporting companies, emerging growth
companies, foreign private issuers, MJDS filers, or registered investment
companies. The rule does provide transition periods for new companies,
companies engaging in business combinations or acquisitions, and companies that
cease to be smaller reporting companies or emerging growth companies.
The rules will be effective 60 days after publication in the Federal
Register.
# # #
FACT SHEET
Pay Ratio Disclosure
SEC Open Meeting
August 5, 2015
Action
The Securities and Exchange Commission will consider whether to adopt a rule
requiring public companies to disclose the ratio of the annual total
compensation of the chief executive officer (CEO) to the median of the annual
total compensation of the companyfs employees. The rule, which is mandated
by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would provide
investors with information to consider when assessing CEO compensation, while
providing companies with substantial flexibility in calculating the ratio.
Highlights of the New Rule
Pay Ratio Disclosure Requirement
As required by the Dodd-Frank Act, the rule would amend existing executive
compensation disclosure rules to require companies to disclose:
- The median of the annual total compensation of all its employees, except
the CEO;
- The annual total compensation of its CEO; and
- The ratio of those two amounts.
Methodology for Identifying the Median Employee
To identify the median employee, the rule would allow companies to select a
methodology based on their own facts and circumstances. A company could
use its total employee population or a statistical sampling of that population
and/or other reasonable methods. A company could, for example, identify
the median of its population or sample using:
- Annual total compensation as determined under existing executive
compensation rules; or
- Any consistently-applied compensation measure from compensation amounts
reported in its payroll or tax records.
A company could apply a cost-of-living adjustment to the compensation
measure used to identify the median employee. If a company applies this
adjustment, it would need to use the same cost-of-living adjustment in
calculating the median employeefs annual total compensation. To provide
context for this adjustment, a company electing to present the pay ratio in this
manner must also disclose the median employeefs annual total compensation and
the pay ratio without the cost-of-living adjustment.
A company also would be permitted to identify its median employee once every
three years unless there has been a change in its employee population or
employee compensation arrangements that it reasonably believes would result in a
significant change to its pay ratio disclosure. Also, within those three
years, if the median employeefs compensation changes, the company may use
another employee with substantially similar compensation as its median
employee.
Determination of Total Compensation
A company would be required to calculate the annual total compensation for
its median employee using the same rules that apply to the CEOfs
compensation. gAnnual total compensationh means total compensation for the
last completed fiscal year, calculated using the definition of gtotal
compensationh in existing executive compensation rules, namely Item 402(c)(2)(x)
of Regulation S-K. The rule would allow companies to use reasonable
estimates when calculating any elements of the annual total compensation.
Identification of Employee Population
A company would be permitted to select a date within the last three months
of its last completed fiscal year on which to determine the employee population
for purposes of identifying the median employee.
Subject to certain exceptions, the company would be required to include all
employees – U.S. and non-U.S., full-time, part-time, temporary and seasonal –
employed by the company or any of its consolidated subsidiaries in performing
its pay ratio calculation. Individuals employed by unaffiliated third
parties or independent contractors would not be considered to be employees of
the company.
A company could exclude non-U.S. employees from the determination of its
median employee in two circumstances:
- Non-U.S. employees that are employed in a jurisdiction with data privacy
laws that make the company unable to comply with the rule without violating
those laws. The company would be required to obtain a legal opinion from
counsel on the inability of the company to obtain or process the information
necessary for compliance with the rule without violating the jurisdictionfs
laws or regulations governing data privacy.
- Up to 5 percent of its non-U.S. employees, including any non-U.S.
employees excluded using the data privacy exemption. If a company
excludes any non-U.S. employee in a particular jurisdiction, it must exclude
all non-U.S. employees in that jurisdiction.
Companies would be permitted, but not required, to annualize the total
compensation for a permanent employee who did not work for the entire year, such
as a new hire. In contrast, full-time equivalent adjustments for part-time
workers and annualizing adjustments for temporary and seasonal workers would not
be permitted when calculating the required pay ratio.
Disclosure of Methodology, Assumptions, and
Estimates
Companies would be required to briefly describe the methodology used to
identify the median employee, and any material assumptions, adjustments
(including cost-of-living adjustments), or estimates used to identify the median
employee or to determine annual total compensation. If a company
identifies a median employee based on a consistently applied compensation
measure, it would be required to disclose the measure it used. Also,
companies would be required to clearly identify any estimates used.
Additional Disclosure Permitted But Not
Required
Companies would be permitted, but not required, to supplement the required
disclosure with a narrative discussion or additional ratios. Any
additional discussion and/or ratios would need to be clearly identified, not
misleading, and not presented with greater prominence than the required pay
ratio.
Filings Where Disclosure Is Required
Companies would be required to describe the information in registration
statements, proxy and information statements, and annual reports that must
already include executive compensation information as set forth under Item 402
of Regulation S-K.
Companies would not be required to:
- Disclose the pay ratio information in reports that do not require
executive compensation information, such as current and quarterly
reports.
- Update their disclosure for the most recently completed fiscal year
until the company files its proxy or information statement for its annual
meeting of shareholders (or annual report for companies that do not file proxy
or information statements for annual meetings), but not later than 120 days
after the end of the fiscal year.
Companies Subject to the Disclosure Requirement
The disclosure requirement would apply to all companies required to provide
executive compensation disclosure under Item 402(c)(2)(x) of Regulation
S-K. Smaller reporting companies, foreign private issuers, MJDS filers,
emerging growth companies, and registered investment companies would not be
subject to the requirement.
A company subject to the pay ratio requirement would be permitted to omit
from its calculation any employees obtained in a business combination or
acquisition for the fiscal year in which the transaction becomes
effective. The company would be required to identify the acquired business
and disclose the approximate number of employees it is omitting.
Compliance Dates
Companies would be required to report the pay ratio disclosure for their
first fiscal year beginning on or after January 1, 2017.
A company that had not previously been a reporting company would be required
to report the pay ratio disclosure for the first fiscal year following the year
in which it becomes subject to the Commissionfs reporting requirements, but not
for any fiscal year commencing before January 1, 2017.
Background
Section 953(b) of the Dodd-Frank Act directs the Commission to amend
existing rules to require companies to disclose:
- The median of the annual total compensation of all employees of the
company, except the CEO;
- The annual total compensation of its CEO; and
- The ratio of those two amounts.
Under SEC rules, companies are required to provide extensive information
about the compensation of its CEO and other named executive officers.
Companies currently are not, however, required to disclose the same compensation
information for other employees.